Russia’s people problem

President Vladimir Putin is generally fond of blaming the West for the ills besetting Russia. This week though, he admitted in his State of the Nation speech that the roots of Russia’s sluggish economy may lie at home rather than abroad. The government expects the economy to expand a measly 1.4 percent this year (less than half of the growth the US is likely to see) and long-term growth estimates have been trimmed to 2.5 percent a year.

Much of that is down to the lack of reform which has left many big companies in the state’s (generally wasteful) hands, weak rule of law that deters investment and capital flight to the tune of tens of billions of dollars a year. Yet there is another factor that could be harder to fix — Russia’s poor demographic profile. The population started declining sharply in the early 1990s amid political and economic turmoil, falling by 3.4 million in the 2000-2010 decade, according to census data. The impact is set to be felt sharply from now on, exactly when children born in 1990s would have started entering the workforce.

The consequences are already being felt. Russia will close more than 700 schools this year for lack of pupils and the jobless rate has dipped to a record low of around 5 percent, not because the economy is booming but because the country is running out of people who can take the jobs.

Russian bank VTB estimates that the labour force will shrink at the rate of 0.3-0.5 percent a year over the next decade. And Natalia Orlova, chief economist at another Russian bank, Alfa, (the source of the above graphic) says that in 2013, the labour force will have shrunk by 800,000, a decline that she expects will gather momentum and ultimately end up at 2 million a year. Not only will the labour force shrink by 3 percent between 2013-2016, but the share of skilled employees in the workforce has halved over the past decade, she says:

The demographic wave is coming into the market. For the past five years, it was not felt by companies. Now we will see the impact of the population decline as more people become pensioners and fewer young people come to the jobs market. The growth rates of the past decade coincided with better demographics of the 1980s. So we have at least 10 years ahead that should be very painful.

Orlova also points out that with low unemployment rates and relatively generous social welfare, Russians are happy to spend more and save less. That in turn is affecting investment levels which are stagnant around 23 percent, well below levels in most big emerging economies and recognised to be relatively poor quality. She is more pessimistic than the government, reckoning Russia’s medium-term growth to be no more than 1.5-2.0 percent a year., basing this on the country’s almost zero output gap (the difference between an economy’s actual output and the output it could achieve when it is most efficient). Check out her graphic below:

Russia can get around this problem to some extent by boosting labour productivity. But an average Russian produces in one working hour less than 40 percent of the output of a typical American worker, something Putin acknowledged yesterday to be a problem.

Meanwhile, there was some good news from Putin’s speech yesterday on the demographic front: this year, for the first time since 1991, Russia’s birth rate is running above its death rate.